Wednesday, October 06, 2010

A study of five states facing dire budget and economic problems found that most residents would tolerate a tax increase to fund certain services, but in many cases, their expectations and understanding of states' budgets were unrealistic.

The Pew Center on the States and the Public Policy Institute of California asked residents in Arizona, California, Florida, Illinois and New York about their states’ budgets. Each state had at least 1,000 respondents to the survey. The margin of error was plus or minus 4 percent.

The study found some common themes across all states. People are beginning to feel a sense of urgency and would like to see their state governments change they way they craft budgets — Illinois more so than any other state. Eighty-six percent of Illinois respondents felt change is needed immediately.

From the report: “Majorities in all locations believe major changes are needed in their state’s budget process — and they overwhelmingly think their elected leaders should take action now, rather than wait until the economy improves.” Respondents were more concerned with the effectiveness and efficiency of government than its size.

While taxes were not the preferred means to close budget gaps, the majority of those surveyed said they would tolerate a tax increase to protect K-12 education, health care and human services from cuts. However, they would prefer targeted tax increases instead of an across-the-board income tax hike. People favored increased taxes on cigarettes, alcohol, gambling, corporations and the incomes of the wealthy.

Participants in all five states were averse to borrowing, seeing it as pushing problems further into the future. They also expressed distrust in government and a desire to see a better return on their tax dollars.

Some of the results were contradictory: “By hefty margins, respondents across the five states say they are very or somewhat concerned about the effects of state spending reductions on government services. Yet they also name spending cuts as their first choice to balance state budgets. Solid majorities believe that a good portion of their state’s budget squeeze can be solved relatively painlessly by reducing waste and inefficiency in government without affecting services.”

Those who said "relatively painless" cuts could be made believed they could amount to 10 to 20 percent reductions in overall spending.

However the authors of the study said states may not be able to bear such cuts without services taking a hit:

“It is a strikingly consistent view, but experts who work closely with state budgets say it may not be realistic, especially given the steep spending reductions many states already have made since the recession started — both fiscal years 2009 and 2010—the first decline in general fund spending for two consecutive years on record. Forty states decreased their general fund expenditures in fiscal year 2010.” The study sites a 6.8 percent decrease in state spending nationwide during fiscal years 2009 and 2010.

According to the study, such contradictions are evident in Illinois: “One of the difficulties for Illinois lawmakers who want to follow public sentiment — such as avoiding debt — is that the public sends mixed signals.

Almost 90 percent of Illinoisans who participated in the survey are concerned about the effect cuts could have on state services. Yet more than 70 percent said their first choice for balancing the budget would be cuts. Almost 20 percent would raise taxes and fees, while only 6 percent would borrow.

However, 70 percent said they would support a tax increase to avoid cuts in K-12 and higher education. Nearly 60 percent would support a tax increase for health care and human services.

More than 60 percent of Illinoisans would support an increase in alcohol, cigarette taxes and corporate taxes, and more than 50 percent would support gambling expansions. Only 26 percent — the highest numbers out of all five states surveyed — said they would support an income tax increase.

The authors of the study point out that those revenue options may not be enough to maintain the services respondents say they value. “These are not major sources of revenue for the state, so even if they were increased, they would not bridge the gap. And there are other obstacles to these options: For instance, increasing income taxes on businesses is complicated.”

Part of the issue may be that respondents did not fully understand the major sources of revenue and spending in the budget. Nearly one fifth of those surveyed thought that transportation makes up the largest area of spending in the state budget, when in reality the three areas they most want to protect — education, health care and human services — are by far the biggest demands on the general revenue fund.

Transportation was the category respondents were least inclined to protect from cuts, perhaps mistakenly believing cuts to that area could lead to large general revenue fund savings.

Mark Baldassare, president and chief executive officer of the Public Policy Institute of California, said respondents might be too quick to discount borrowing because it is a valuable tool for states when economic conditions take an unexpected turn. “Borrowing is a very common part of the way state and local governments operate,” he said. He added that states need to take care not to rack up so much debt during the current crisis that debt service payments eat up large portions of future budgets. Baldassare cited Illinois’ $9.4 billion in borrowing for fiscal year 2010.

The public opposition to borrowing my be due, in part, to participants from all five states wanting to see their elected officials take action and respond to the economic crisis. “[They are saying:] ‘We shouldn’t be waiting for the economy to get better. We should be taking action now,’” Baldassare said.

He added that respondents seem open to being part of the solution when it comes to budget shortfalls. “I think it also shows that people are willing to do their part. … The public would rather not have tax increases, but for the right thing — in this case, education and human services — they are willing to pay and out of their own pockets.”

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